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The report...

WASHINGTON (dpa-AFX) - Atmel Corp. (ATML) Monday announced a profit of $4.7
million $0.01 per share compared to a loss of $6.5 million $0.02 per share last
year. On an adjusted basis, earnings were $24.9 million or $0.06 per share.
On average,...

Semiconductor Equipment and Materials International, the main trade association within the semiconductor industry has estimated that overall sales in the industry will slow beginning in 2008.[1] In response to this outlook, Atmel has begun moving towards a fab-lite manufacturing model, which emphasizes the use of third-party foundries for part of the manufacturing process and helps to decrease costs.

Specifically,the movement to the fab-lite model has been driven by the increasing cost of raw materials; in particular, the silicon wafers used to form the foundation of nearly all microchips have seen price increases of more than 25%.[2] ATML must also contend with an industry where annual price decreases can be as high as 33%, reducing profit margins.[3]

In 2008, Atmel purchased Quantum Research Group which is a company that specializes in developing innovative user interfaces, specifically "touch" technologies. Ever since the introduction of the iPhone, the market for touch interface devices has seen significant growth, with more than 50 million cell phones in the market today that have some aspect of this technology and projections by Quantum predicting more than 400 million units by 2011.[4]

Atmel is divided into four main division with each group specializing in microchips that are related to a unique consumer end market. Each microchip, before it is shipped to consumers, is placed through a battery of tests to measure its performance along a defined set of metrics that are common in the semiconductor industry . Some of the key metrics used in this industry are laid out below.

Measures the amount of time it takes to access a packet of data from a microchip. Both ATML and its competitor Advanced Micro Devices (AMD) offer chips with access times of less than 50 nanoseconds

Power Consumption

Measures in amps the amount of power a microchip uses per hour. Low power usage chips by ATML are frequently used in mobile devices such as cellphones.

Endurance

Measures the number of write/erase cycles that can be completed on a microchip in its lifetime before deterioration of the hardware components. Both ATML and its competitor Microchip Technology (MCHP) have been able to create chips with an endurance of 1 million cycles.

Business Segments

The ASIC division is responsible for the design and manufacturing of integrated circuits that are able to be custom tailored based on customers demands. Additionally, the ASIC division manufactures secure microcontroller-based smart cards that often appear in such devices as the SIM cards that are often placed inside of cell phones.

The microcontroller division of ATML is its most profitable division.The two main products are ATML's proprietary AVR and ARM-based microcontrollers both of which have seen strong growth. The former is a heavily used microchip, particularly in the automotive industry , that has the ability to both store and process information without the need for any external add-on devices.[7] The latter is also a microchip that is based on a separate architecture that is most noted for its power saving features, making it one of the most popular microchips used in the mobile communications industry.[8]

Nonvolatile memory (NVM) in the technology industry refers to any product that can retain information even when its power is turned off. The NVM market is the most competitive one in which ATML sells its products resulting in continued price decreases.

The radio frequency division in ATML specializes in manufacturing wireless key fobs as well as software systems that can detect and prevent car theft. This department is also home to ATML's radio frequency identification (RFID) tags that have become heavily used in the retail industry to track inventory as well as shipments.[9]

Key Trends and Forces

Since 2005, the average price per gigabyte of NVM has fallen from more than $45 to less than $10.[10] This precipitous price drop is reflective of the larger trend of large annual product price decreases in the semiconductor business. Another important component of the cost involved in producing a microchip is the cost of the transistors, or the "switches" on the chip that help to relay electrical signals. A metric that examines the cost of building one million transistors onto a signal microchip demonstrates that prices fall an average of 35% each year.[11] This pattern of continuously decreasing prices has lead ATML to post extremely thin profit margins.

More broadly, in an industry with profit margins on average of less than 3%[12], ATML, along with other firms, are forced to introduce numerous new products each year that are solely geared towards maintaining profit. The longer ATML keeps the same microchip in the market place the smaller the profit it will earn on that product. However, this rapid development can lead to numerous negative repercussions. On average, less than half of all product launches in the semiconductor industry actually meet their scheduled launch date.[13] These pressures to innovate can also cause budget overruns and raise quality concerns.

Since 2005, ATML, along with much of the semiconductor industry , has been slowly transitioning towards a fab-lite model of manufacturing where the majority of chip production is delegated to third-party foundries. Fab-lite is distinct from outsourcing in the sense that production could still take place within the borders of one country. However, this yip yap production is now carried out by specialized firms, or foundries unlike ATML, that have are focused solely on the manufacturing end of the process.

In 2008, ATML made plans to sell one of its largest factories in Rousset, France, which would result in a loss of 210 workers.[14] The advantage of a fab-lite model is cost, allowing a firm to specialize in design and engineering.[15] However, this strategy creates an increased dependence on outside suppliers coupled with a decreased ability to internally compensate for any lapses in production.[16]

More than 50% of ATML's revenues come from sales in Asia, exposing it to the risks associated with Asian economics. A 2008 report by the Semiconductor Equipment and Materials International (SEMI) trade group predicts that spending in the semiconductor industry will fall by more than 20%, lead by the Asian economies.[17] This would have a severe negative impact on ATML's sales.

Atmel's acquisition of Quantum Research exposes the company to the growing touch interface cell phone market

In 2007, Atmel acquired Quantum Research Group, which makes touch interface technology. In 2008, the cell phone market saw almost 20 different models that operate primarily through the use of a touch screen introduced to the market.[18]

Research firms have also predicted that 40% of all cell phones will incorporate some aspect of touch technology by 2012.[19] The technology developed by Quantum Research Group has been used in a wide variety of products including the first ever mobile phone to incorporate an iPod style scroll wheel into its interface[20], making the company a likely beneficiary of touch screen market growth.